Dhirendra Kumar explains how to design an appropriate withdrawal plan
Kindly suggest a fixed-income alternative for 20 to 25 years in place of an annuity plan to get regular income.
Firstly, it's a good idea to shift to another fixed-income alternative because annuity in India is neither very efficient nor very cheap. And it's not just you. Even the Pension Fund Regulatory and Development Authority (PFRDA) which mandates 40 per cent of your money accumulated in National Pension System (NPS) must be used for buying an annuity, is reconsidering if one can mount a withdrawal plan instead. PFRDA has also understood that annuity should not be the only alternative, and it may not be the finest one either. So Piyush, you are well on track.
The way to design your plan is first to review your monthly income requirement and your capital, then check if it matches. In the initial years, you can't do anything much about this equation. Any withdrawal rate beyond 6 per cent in the initial years makes you prone to the risk of eating into your capital. It will expose you to significant risk because when you are trying to have a long-term withdrawal plan from your investment, you have to make sure that you are conservative enough not to dip into your capital. And there may be times that you may get very unlucky with the market. Depending on that, you have to decide on the asset allocation. Maybe an all-fixed-income plan may not be good enough. For such a plan to support rising income, one will have to settle for a withdrawal rate that cannot exceed 4 per cent. Think of it simplistically - a withdrawal plan enables you to take a good part of your income and leave a small part of your growth. So, assuming that you have Rs 100 and it grows by 8 per cent. If you take out 6 per cent, you leave a little bit of the appreciation to support a higher income the following year. But if you consume all of it, the capital will remain constant. So, that is not a good thing because your need for higher income will rise in the next 25 years. There is no way that 10 years from now you will require less money. You are bound to need more money. Thus, you have to leave a part of your growth and not consume all of it.
So, you will have to think of some conservative allocation, maybe 15-35 per cent in equity, depending on the scale of your investment. Because you will have to assume the risk if you have less capital, but if you have enough capital, you can afford to have less allocation to equity. Make sure to convert it into a variable annuity. The ideal plan is, whatever the appreciation is in the current year, one should take out 80 per cent of that appreciation next year, and then leave 20 per cent there. This way, you will have some cushion for your capital to grow, and this is how you will have to revise it. So, in good times, your income will grow more, but you will not eat into your capital in bad times, and it will still be reasonable. This kind of discipline is what is required.